Ukraine Gas Cut-Off Near as Russia Protests Border Breach

Police inspect a destroyed car following an explosion outside the regional state building in the eastern Ukrainian city of Donetsk late on June 12. Photographer: Alexander Khudoteply/AFP via Getty Images

June 14 (Bloomberg) -- Ukraine is bracing for a halt in
natural gas flows after one of its army vehicles crossed into
Russia during clashes with rebels, raising tensions between the
countries and prompting a protest from President Vladimir Putin.

Ukrainian Prime Minister Arseniy Yatsenyuk yesterday
instructed authorities to prepare for a gas cut-off after a
deadline set by OAO Gazprom for Ukraine’s past payments for the
fuel expires on June 16. An armored personnel carrier crossed
100 meters (330 feet) to 150 meters into Russian territory as
government troops were chasing insurgents, Serhiy Astakhov, an
aide to the head of Ukraine’s border service, said by phone.

The showdown over gas shipments heaps pressure on Ukraine’s
new president, Petro Poroshenko, who’s struggling to fulfill a
pledge to halt the unrest during his first week in office after
peace negotiations that include Russia so far failed to yield a
cease-fire. The European Union, dependent on Russian gas piped
through Ukraine for about 15 percent of its supplies, is trying
to broker a deal to avoid interruptions seen during comparable
disputes in 2006 and 2009.

“Although de-escalation looks increasingly likely, we
still see risks of tensions rising again as a result of ongoing
conflict or diplomatic differences,” Alina Slyusarchuk and
Jacob Nell, analysts at Morgan Stanley, said in an e-mailed
report. “We see gas talks as derivative of the wider dispute
between Russia and Ukraine over Crimea, the Ukrainian
constitution and Russia’s involvement in Ukraine.”

Discount Scrapped

Gazprom rescinded a price discount granted to Ukraine in
December citing its mounting debt, while Russia stripped its
neighbor of a 2010 export-duty break that it exchanged for a
lease on its Black Sea fleet’s port in Crimea, which Putin
annexed in March.

The deadline for Ukraine to pay $1.95 billion for past
supplies or be moved to prepayment is June 16, according to
Gazprom CEO Alexey Miller. Ukraine refused to pay after Russia
raised the gas price by 81 percent in April.

Russia turned down proposals from Ukraine backed by the EU,
according to a statement on the Ukrainian government’s website.
The EU suggested an interim price of $326 per 1,000 cubic
meters, which Ukraine would accept, Andriy Kobolyev, chief
executive officer of national energy company NAK Naftogaz
Ukrainy, told reporters in Kiev. Gazprom’s final price offer for
Ukraine is $385, the Moscow-based company said in a statement.

Two Days

“We are preparing for the worst-case scenario, when gas
would not be supplied to Ukraine at all,” Kobolyev said in
televised comments. “But we still hope to find a compromise, as
we have two days.”

Ukraine’s hryvnia, this year’s worst-performing currency
against the dollar with a 30 percent plunge, strengthened 0.8
percent yesterday in Kiev, the capital, data compiled by
Bloomberg showed. The ruble was 0.1 percent weaker.

Yatsenyuk ordered Ukraine’s Foreign Ministry and Energy
Ministry to inform EU countries and the U.S. that Russia
“deliberately” undermined the talks on gas supplies and
rejected constructive proposals. The premier also instructed
Naftogaz to file for international arbitration against Gazprom
and called for an “economically justified” rate for fuel
transit to Europe, according to the government statement.

‘No Willingness’

Russia rejects Ukraine’s accusations that it’s disrupting
the talks and is “seeing no willingness on the part of our
Ukrainian colleagues to reach an agreement,” Putin’s spokesman,
Dmitry Peskov, said on the Echo Moskvy radio station.

With the two countries locked in the dispute over gas
prices, tensions spilled over their border as clashes continued
in Ukraine’s easternmost regions.

Putin instructed the Foreign Ministry to hand a formal
diplomatic complaint to Ukraine over its border incursion,
Interfax cites Peskov as saying. It’s a “gross violation of the
fundamental rules of international law,” the ministry in Moscow
said in a statement, demanding an “end to such provocations”
and adding that a note of protest is being sent to Ukraine.

The breach happened as Ukraine intensified an offensive
against insurgents as it battled a rebel convoy of armored
vehicles, including the first reported separatist tanks. NATO
warned that reports of an armored column entering from Russia
would mark a “serious escalation” in the months-long conflict.

The separatists acquired heavy weapons and military
equipment from Russia, including Russian tanks and multiple
rocket launchers, Maria Harf, a spokeswoman for the U.S. State
Department, said in an e-mailed statement.

‘Heavy Losses’

Insurgents in the Donetsk region city of Mariupol suffered
“heavy losses” and two government troops were injured as a
planned operation against militants began at 4:50 a.m.
yesterday, Interior Minister Arsen Avakov said on Facebook.

“I continue to urge Russia to complete the withdrawal of
its military forces on the border with Ukraine, to stop the flow
of weapons and fighters across the border, and to exercise its
influence among armed separatists to lay down their weapons and
renounce violence,” NATO Secretary General Anders Fogh
Rasmussen said in an e-mailed statement yesterday.

The operation in the Sea of Azov port city of Mariupol was
“successful,” with Ukrainian forces taking control of all the
separatists’ strongholds, according to Avakov, who said 11
people were detained, two mines neutralized and Donetsk-bound
vehicle containing weapons was detained at a road block.

The offensive ended with 40 militants detained, Semen
Semenchenko, a military commander, said on Facebook. Three
people were hospitalized with injuries, according to the Donetsk
governor’s office.

‘Not Acceptable’

Former U.S. Secretary of State Hillary Clinton accused
Russia of continuing to unsettle its neighbor and said Putin is
seeking to control nations on his borders.

Ukraine invited Russia and EU Energy Commissioner Guenther
Oettinger for more talks over the weekend, Kobolyev said. Olga
Golant, a spokeswoman for Russia’s Energy Ministry, gave no
confirmation of any discussions during the weekend when
Bloomberg phoned seeking a comment.

Naftogaz is ready to pay its outstanding debt and set up a
payment schedule if Gazprom accepts the price suggested by the
EU, Kobolyev said.

EU Proposal

Under the EU proposal, Naftogaz would pay $326 per 1,000
cubic meters, Kobolyev said. Gazprom had offered $385 per 1,000
cubic meters, a $100 discount to the current price, while
Ukraine sought a return to the first-quarter price of $268.50.
The EU called Gazprom’s offer “appropriate,” Miller said in
televised comments.

Ukraine must pay for gas delivered in November and December
and some of its bill for April and May by 10 a.m. Moscow time on
June 16 or risk being moved to a system of advance billing, with
supply dependent on payments made, Miller also said.

“I am optimistic that we will do all to avoid disruption”
of Russian gas supply and the EU will seek to continue talks as
soon as possible, Oettinger said.